GBP-EUR Exchange Rate Hits Nine-Month High in June but Remains Choppy
The GBP-EUR rate began June with a spring in its step, jumping to a fresh five-month high. The pair broke above 1.1650 after the latest Eurozone consumer price index cooled European Central Bank (ECB) interest rate expectations – with inflation in the bloc easing from 7% to 6.1%, versus the expected 6.3%.
The pair, which was unable to cling onto its early gains, was buoyed by lacklustre Eurozone data on 6 June. German factory orders and Eurozone retail sales both printed below expectations, compounding softening Eurozone consumer inflation expectations – a triumvirate of factors that dented ECB rate hike bets.
The latest estimate for economic growth in the Eurozone was revised downwardly on 8 June – with the economy unexpectedly contracting 0.1% in the first quarter of 2023. News that the Eurozone fell into a recession at the start of the year propelled the pound to its highest levels against the single currency since September – an upward trajectory that was supported by Bank of England (BoE) rate hike bets.
Almost a week later, the GBP-EUR rate briefly touched a nine-month high following upbeat UK GDP data. The British economy expanded in April, stoking expectations for more aggressive action from the BoE. But gains were fleeting following better-than-expected industrial production data from the Eurozone together with a weaker dollar.
The pair received another shot in the arm on 16 June as persistent UK inflation boosted expectations that the BoE will continue its tightening cycle throughout the summer. This dampened support the euro received the previous day when the ECB made good on bets by hiking interest rates by 25bps –further opening the door for a July hike.
A combination of expectations for further ECB policy tightening, sticky UK inflation – which remained unchanged at 8.7% – and fresh recession fears blunted the pound’s sharp rise, causing it to drop into the 1.16 range against the euro.
The GBP-EUR rate was volatile on 22 June as markets digested the BoE’s greater-than-expected interest rate hike in a bid to quell inflation – with the 50bps increase in borrowing costs perpetuating concerns of a UK recession.
The volatility trend was underscored the next day when the pound was catapulted back above 1.17 by strong UK retail sales, which posted a second consecutive month of rises, hinting at a resilient economy amid recession fears. Meanwhile, the euro felt the weight of weaker-than-expected flash PMIs, pointing to a stuttering economy.
Hawkish comments by ECB President Christine Lagarde – who warned the central bank’s fight against inflation is far from over – couldn’t prevent the GBP-EUR rate from plunging to a two-week low in the 1.15 range, as central bank chiefs spoke at the ECB’s annual forum on 28 June.
Meanwhile, BoE Governor Andrew Bailey said he’s aware the market is pricing in more rate hikes from the central bank – his response to the speculation was rather coy: “We’ll see”.
GBPEUR: 3-Month Chart
Looking ahead
With no meeting of BoE rate-setters in the diary, key economic data will be in focus for the pound in July: Claimant Count Change (11 July), ILO Unemployment Rate (11 July), Consumer Price Index (19 July), Retail Sales (21 July), S&P Global Composite PMI (24 July).
ECB policymakers will have Christine Lagarde’s comments ringing in their ears when they make their next interest rate decision on 27 July, after she said: “Monetary policy currently has only one goal: to return inflation to our 2% medium-term target in a timely manner. And we are committed to reaching this goal come what may.”